What's Replacement Cost Coverage in Home Insurance and Do I Need It?

“Replacement Cost Coverage” is an insurance term that designates how property will be adjusted in a claim.  Replacement cost is the amount it would take to replace damaged property at today’s prices and without deducting for depreciation.  In homeowner’s insurance, replacement cost is most relevant in the adjustment of roofs in weather related claims and personal property in fire and water related claims.  The following are a few FAQs you should know about your homeowner’s insurance coverage:

1. What does replacement cost coverage in homeowner’s insurance mean?  Replacement cost coverage means that should you have a covered claim, your policy will pay the cost to replace your damaged property at today’s prices, without deducting for depreciation. 
    
2. When do I need to have replacement cost coverage?  Replacement cost coverage is required by most banks when there is a mortgage on the home. 
    
3. How is replacement cost coverage calculated?  Replacement cost coverage is calculated based on material and labor costs, and city/county fees.  It also may include the cost of debris removal (e.g. the cost of clearing the foundation of damaged material after a fire).  In short, it is the cost to rebuild your home if it were destroyed. 
    
4. Should I ever consider not having replacement cost coverage on my policy?  I counsel clients to consider not having replacement cost coverage when they have older homes and/or homes that are lower in value.  In these cases, the homes won’t have mortgages and the clients desire reduced coverage in exchange for lower premiums.    
    
   If you have additional questions regarding your coverage choices and how it affects your home insurance premium, please stop by my offices in McKinney, Texas or give me a call at (972) 727-9111.
    
   Stan Polk, CPCU – Agency Owner
   6951 Virginia Parkway, Suite 316
   McKinney, Texas 75071